Senate Republicans are considering some Democrat proposals to expand refinancing to even more Fannie Mae and Freddie Mac borrowers.
The Federal Housing Finance Agency expanded HARP last fall to reduce upfront fees, eliminate a cap on negative equity and reduce some repurchase risk for servicers of the original home loan to allow for more refinancings. Major banks finished installing the program in March, but a major refinancing surge remains elusive.
The Senate Banking Committee held a hearing Thursday on a bill from Sens. Robert Menendez, D-N.J. and Barbara Boxer, D-Calif., to expand the Home Affordable Refinance Program. The bill would allow a new servicer of the loan avoid repurchase and warranty risk from the government-sponsored enterprises and extend the program to cover loans originated prior to June 2010 instead of June 2009.
Between 3 million and 4 million GSE borrowers are underwater, but to date, 1.2 million refinanced through HARP, and only 100,000 of them had loan-to-value ratios above 105%, according to Mark Zandi, chief economist at Moody's Analytics. The housing analytics firm Zillow (Z) released a report Thursday suggesting that the negative equity problem might be larger than originally thought.
While the Menendez-Boxer ideas have been floating around for some time, some parts of the bill at least garnered support from opposing Republicans Thursday, suggesting that a gridlocked Senate may be nearing a compromise.
"I'm open to this. I hope that we'll have a real mark-up on this bill," said Sen. Bob Corker, R-Tenn.
However, Corker expressed some concern about allowing borrowers to refinance through the program multiple times. He also signaled opposition to expanding the eligibility date to June 2010.
"There's been an unwritten rule that ... we would not fiddle with things beyond June of 2009," Corker said.
Zandi, a proponent of the bill, agreed.
"Between June 2009 and June 2010 there were already low rates, and I don't think you're giving up a lot of refinances if you keep the date where it is," he said.
Increasing competition for an expanded HARP seemed to get the most support. Roughly 70% of GSE loans are serviced by the largest banks. Under the expanded program, the original servicer is required to underwrite a new loan to GSE guidelines. Instead, it must only verify a reliable source of income.
If a borrower goes to a new servicer for a HARP refi, the new bank must meet GSE underwriting guidelines for a new loan, thus making it more exposed to buy back the loan should it default.
"We need to inject competition into a market where the largest servicers have an unfair monopoly," Menendez said at the hearing.
But so much business going to these firms is also slowing down the program.
"They simply can't ramp up platforms and hire people fast enough to help the millions of homeowners eligible," said Bill Emerson, CEO of Quicken Loans, which could see a wave of new business if the restrictions are lifted for new servicers. "This results in higher prices for new HARP 2.0 mortgages than otherwise would have existed. Simply implementing more competition could help million of underwater borrowers in short order."
Corker said he was open to this as long as taxpayers wouldn't be left without a major tool to limit bailouts needed for Fannie and Freddie.
"I would be open to streamlining in such a way without eviscerating the GSEs ability to put the loans back," Corker said. "We are saving taxpayers a lot of money by putting loans back."
Christopher Papagianis, managing director for the economic policy think tank e21, is concerned mortgage bond investors, overwhelmed by the continual expansion of government programs, would begin pricing in such a risk, demand more yield and thus making home loans more expensive in the future.
"The new HARP only just began in March. It's also important to recognize that implementing a new program would delay the HARP 2.0 boom that is not yet underway," Papagianis said.
Zandi stressed throughout the hearing that something should be done soon while the Federal Reserve, which happens to be largest investor in mortgage bonds, is keeping rates low.
In 2003, when fixed-rate mortgages were between 5.5% and 6%, mortgages refinanced at an annualized rate of more than $4 trillion, Zandi said in his written testimony. The current level is roughly a fourth of that.
"I would not try to not complicate this in anyway, unless it is clear that it would make it better, because it would slow things down and you will lose your window," Zandi told Menendez. "We are very, very close to more refinancing."